Weatherproof Profits: Plays on Climate Change
03/14/2014 10:00 am EST
Politics aside, Benjamin Shepherd looks at the long-term investment implications of global climate change. The editor of the Inflation Survival Letter also highlights two companies poised to benefit from this trend.
Steve Halpern: We’re here with Benjamin Shepherd, editor of the newsletter Inflation Survival Report. How are you doing today, Ben?
Benjamin Shepherd: Good, and it’s actually the Inflation Survival Letter.
Steve Halpern: Oh, I’m sorry. Forgive me.
Benjamin Shepherd: That’s fine.
Steve Halpern: Before we turn to specific investment ideas, would you tell our listeners about Inflation Survival Letter and your overall strategy and the longer-term goals behind the publication?
Benjamin Shepherd: Sure, we actually launched this past November. It’s our belief that we’re seeing rising inflationary pressures in the US economy as it returns to growth and continues to return to health following the massive recession of a few years back.
We’ve seen the price of food double over the past ten years. We’re seeing wages not keeping up with the rising costs so, really, our goal is to help people hedge their investment portfolios to keep up and exceed these rising costs.
Basically, we do that by focusing on companies and industries that have some built-in resistance to inflation, because they have the power to pass those cost increases through to consumers or end users.
We also really pay a lot of attention to valuation. It’s very important that you not overpay for assets, especially income-generating assets, which we use quite a bit to add an extra cushion against inflation.
Steve Halpern: Now, you recently explored a fascinating subject in your newsletter; climate change. And you looked at the potential investment implications of what is a very long-term trend. Could you expand on that for our listeners?
Benjamin Shepherd: Sure, climate change is actually something that’s really overlooked, particularly in the context of inflation.
When people think about inflation, they tend to think about the monetary policy side of things, governments printing money, but the other leading cause of inflation is, primarily, supply shocks, and climate change has the potential to be the mother of all supply shocks.
We’ve already seen that as far as green prices go, just over the past few years with the massive droughts that we experienced in the Midwest, droughts and fires in Russia and Ukraine, fires and massive flooding in Australia, and all of those forces have combined to drive a more than 30% average increase in the cost of grains, just over the past few years and, ultimately, that causes a whole host of price increases.
Obviously, there are the foodstuffs themselves, things like cereal. The price of meat goes up with the higher cost of grain.
Even the cost of gasoline goes up because of the ethanol mandates, so climate change really has the potential to have a huge impact on investors’ portfolios and it’s really a stealth impact because people generally just don’t think about it.
Steve Halpern: Now, one investment idea in the sector that you like is the area of water management. Could you tell us about Lindsay Corp. (LNN)?
Benjamin Shepherd: Sure, Lindsay Corp. is a large conglomerate. It operates primarily in two main markets. The first is highway infrastructure.|pagebreak|
They make things like movable road barriers, crash cushions, road gratings, all of those things that you see on highway construction projects, but that’s been a shrinking aspect of Lindsay’s business. Right now, it only accounts for between 5% and 10% of revenue in any given year.
The rest of the revenue is tied primarily to sales of irrigation equipment, which has become hugely important in managing these uneven rainfalls that we’ve experienced across the country. The US accounts for more than half of their sales, the rest coming internationally. Most recently, they’re from selling a couple of major irrigation equipment contracts in Iraq.
Lindsay’s revenues more than doubled between 2009 and 2013, which also happens to correspond with that time period when we were seeing more drought problems around the world. Their operating margin has also widened drastically from 6.7% in 2009 to 15.5% last year, as they’ve built more efficiencies into their manufacturing network and capability.
Long-term, I look for Lindsay to really continue to benefit from the fact that rain is becoming more scarce and more uneven. That, in turn, gives investors an excellent hedge against food price inflation because Lindsay’s earnings will rise as the price of food goes up.
Steve Halpern: Now, you’ve also looked to a company called Verisk Analytics (VRSK), an insurance company that has taken the step to create a climate division to address some of the issues you’re discussing. Could you tell us more about this company and what it’s doing in this market?
Benjamin Shepherd: Sure, Verisk Analytics is actually an international consultancy company. They operate in risk management in a whole host of industries, ranging from healthcare and insurance, to financial services.
Back in October, they formed a climate division, which provides weather and environmental analytic capabilities to its clients, primarily insurance companies.
Most recently, I believe it was in 2012, the US insurance industry paid out $35 billion in losses, which was well above the long-term average, and that was tied to events like Hurricane Sandy and a whole host of other natural disasters that spanned the globe.
What Verisk’s climate division does is, it provides the insurance companies with the data that they need to make more intelligent underwriting decisions. It helps them to develop predictive models for adverse weather events.
It helps them to revise their pricing strategies and perhaps even avoid high-risk areas altogether. It’s one of only a few firms that actually offers that type of data on a large scale. I’ve been following it for a while because I also do a lot of work on the healthcare side.
Looking at the climate division, the company has also come to the attention of Warren Buffett and Berkshire Hathaway. Obviously, Berkshire has a huge property and casualty insurance business and, in a 13F filed not too long ago, it was shown that Berkshire is holding onto 1.5 million shares of Verisk.
In looking at the timing of the purchase, I suspect that’s largely driven by this climate division. Over the long-term, that’ll be, again, another nice hedge against climate change because, as these risks continue to grow, Verisk’s earnings should grow commensurately as they help the insurance industry adapt to this new climactic reality.
Steve Halpern: Well, those are two really fascinating ideas. We really appreciate you taking the time today.
Benjamin Shepherd: I appreciate the opportunity, Steve.
Steve Halpern: Thanks.